Limit orders are used by customers who care about the price they’ll pay or receive. Unlike market orders, limit orders guarantee the transaction will occur at a specific price or better. However, they don’t guarantee execution. Let’s walk through a few examples.
Buy limit orders
Buy 100 shares of ABC stock @ $50 limit
Trading tape: $51.03… $51.01… $49.99… $49.98… $50.01…
The investor wants to buy 100 shares of ABC stock but won’t pay more than $50 per share. A buy limit order executes only when the stock trades at $50 or lower. The trading tape shows available prices for the security from left to right. Here, $49.99 is the first price at $50 or below, so the order fills at $49.99. Investors use buy limit orders to try to get a better price. For example, if the stock is currently $55, a customer could place a buy limit at $50. If the order executes, they buy the stock for $5 less per share. The trade will only happen, though, if the price falls to $50 or below. Let’s see if you can answer a buy limit order question.
Buy 100 shares @ $75 limit
Trading tape: $75.02… $75.03… $74.97… $75.00… $75.01…
At what price does the order go through?
(spoiler)
Answer = $74.97 Buy limit orders fill at the limit price or lower. $74.97 is the first price available that’s $75 or lower.
Here’s a video that dives further into buy limit orders:
Sell limit orders
Let’s look at a limit order from the sell side:
Sell 100 shares of XYZ stock @ $70
Trading tape: $69.95… $69.98… $69.99… $70.01… $69.99…
At what price does the order go through?
Even though the word “limit” isn’t shown, it’s assumed to be a limit order if a price is specified and nothing else is stated. This is a sell limit order, where the customer wants to sell 100 shares of XYZ stock at $70 or higher. A sell limit order executes only when the stock trades at the limit price or above. In the trading tape, $70.01 is the first price at $70 or above, so the order fills at $70.01. Let’s see if you can answer a sell limit order question.
Sell 100 shares @ $30
Trading tape: $30.05… $30.02… $29.99… $29.97… $30.01…
At what price does the order go through?
(spoiler)
Answer = $30.05 Sell limit orders fill at the limit price or higher. $30.05 is the first price available that’s $30 or higher.
Here’s a video that dives further into sell limit orders:
Timeframe
Limit orders may take time to execute because the market has to reach the specified price. Because of that, limit orders are often entered with a time condition:
Day orders cancel at the end of the trading day if they haven’t executed. GTC orders remain in effect until the customer cancels them.
Key points
Limit orders
Seek better prices for investors
Guarantee price, but not execution
Day or GTC orders
Buy limit orders
Execute when the price falls to or below the limit price
Sell limit orders
Execute when the price rises to or above the limit price
Limit orders are used by customers who care about the price they’ll pay or receive. Unlike market orders, limit orders guarantee the transaction will occur at a specific price or better.